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Nash Equilibrium in the Ongoing Trade War

In the beginning of June, Trump announced that the United States would be adding a 25% tariff on $34 billion worth of imported goods from China – particularly targeting industrial machinery, auto parts, and medical equipment. The Chinese government retaliated in a tit-for-tat manner, and the “Trade War” has been continuing for the past 3 months, with little indication of ending. Just yesterday, the US added tariffs on $267 billion goods; the implications of the actions of these two governments are widespread – not only are the domestic industries of both countries suffering from disruptions in their supply chain, the US Dollar has been appreciating, affecting the currency exchange rates for US foreign investors on an international level. This has had lasting factors on economies of emerging countries – Argentina, Brazil, Turkey – and investors in these countries’ bonds who are beginning to cash in on their bonds.

With so much on the line – not just for China and the US, but for the entire world’s economy – it is crucial that the two sides of the conflict eventually reach a Nash Equilibrium point where both countries have sacrificed enough and reach a compromise. To the laments of international relations and economic professionals, and other incredibly intelligent and educated individuals, the US government has continued enforcing tariffs, even as its domestic industries begin to feel the economic squeeze of increasing costs for supplies as China begins to tax its exports as well. Some of the largest companies in the world – Apple and every car manufacturer – have reported estimated losses in revenue as their operating expenses increase due to their largely integrated supply chains, where increases in cost of goods sold due to tariffs can cause chain effects.

As stated by John Nash, the namesake of the Nash Equilibrium, there is always a strategy that leads to an equilibrium point between the two players. According to many historians, this strategy is for China to take on a conciliatory approach so the US will stop taxing more Chinese imports. The US is seen as having the upper hand, as it imports parts that are produced in China for cheap, but could also be produced domestically for a much higher price. However, China imports food from the US to feed its rapidly growing population that is triple the size of the US’s; therefore, the US has an advantage and China should be the first to cease.

The US imported $505.8 billion in goods from China in 2017, and if the US were to impost tariffs on all Chinese imports, the lasting repercussions would ripple through the economy on a global scale. Inflation would skyrocket as the dollar appreciates further, which would greatly affect the currencies in other countries and essentially halt international trade. Thus, it is imperative that the two countries find a Nash Equilibrium strategy that does not result in plundering the world’s economy into a chaotic recession.


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September 2018